How Banks And Blockchain Are Getting Along
As the world realizes the potentials blockchain technology holds, many executives and managers are analyzing ways their companies in respective industries such as the banking system can benefit from and leverage this technological advancement. We currently live in a growing intangible asset economy, companies are focusing on finding the best ways to invest in digital and intangible assets such as bitcoin while minimizing risk.
Blockchain, the facilitator of such growing digital asset economy, is the technology behind bitcoins record management distributed ledger system launched after the financial crisis of 2008. Bitcoin in its own nature can act as a bank for the unbaked for billions of citizens worldwide. It offers similar digital resources as a bank such as decentralized P2P cross-border transactions, record management with blockchain, account and identity management, and trust in an honest Proof of Work consensus. You just need a connection to the internet to participate in the bitcoin network, and for this reason, many foresaw the financial/banking systems will be the first to get disrupted by this technology. Many banks don’t want to associate themselves with cryptocurrencies such as bitcoin yet but are willing to test the blockchain waters for their different antiquated services that could use some improvements.
Jamie Dimon, the CEO of J.P Morgan has stated in the past
“ JPMorgan will use blockchain for a whole lot of things”.
When an executive of one of the largest banks in the world validates a technology, it means there is a lot of potentials and use cases to test early on to not be left behind in the future. Instant cross-border transactions and payments, savings on operational costs for clearance and settlement systems, and private zero-knowledge transactions are some of the services being tested out by banks today. In this article, we will bring three use cases the banking system is taking advantage of blockchain technology today and how other banks can follow this trend.
BNY Mellon- Blockchain based US Treasury bond settlement
The Bank of New York Mellon, is an American worldwide banking and financial services holding company headquartered in New York City with $1.8 Trillion in assets under management. They focus on providing a suite of foreign exchange, securities finance, collateral management and segregation, capital markets and prime brokerage services as well as custody and wealth management. They launched the US treasury bond settlement- BDS360 with blockchain technology back in 2016 as a backup record to their system. This blockchain can reduce the three-five days settlement of bonds to 1–10 minutes in a secure, transparent, more affordable, and instant manner. The backend is bypassing intermediaries that do not trust each other and antiquated infrastructure by clearing and verifying a bonds authenticity within a blockchain.
What's next for BNY Mellon- Cryptocurrency custody has been a hot topic for banks to look into. Fidelity will roll out their custody service for cryptocurrency trading customers in 2019, will BNY Mellon follow?
Banco Santander- Cross-border transactions
Banco Santander is a Spanish multinational commercial bank and financial services company founded and based in Santander, Spain raking $54 Billion in revenue in 2017. With services all around the world, Banco Santander and blockchain technology are a match made in heaven due to the instant cross-border transaction this technology offers. Together with Ripple’s service Xcurrent, Santander launched One pay FX in 2018 to roll out a distributed app (Dapp) offering same day International transactions for customers in Brazil, Spain, U.K, and Poland. The traditional system takes three-five day and charges an average of $25 fee + 3–7% to its customers depending on the bank to finalize an international transaction.
What’s next for Banco Santander- A recent press release made by the bank states that they are looking to change how securities are issued, traded and settled with blockchain technology.
ING- Zero knowledge proof set membership
The ING Group is a Dutch multinational banking and financial services corporation headquartered in Amsterdam. Its primary businesses are retail banking, direct banking, commercial banking, investment banking, asset management, and insurance service with 37 million clients worldwide. They have tested blockchain technology to increase confidentiality in a public ledger using Zero-Knowledge Range Proof (ZKRP) solutions. Developed in-house, the team's test has demonstrated significant efficiency improvement to protect clientele private information. ‘Zero-Knowledge Proof’ allows a party to verify the accuracy of a statement without conveying the actual information in the statement. Zcash is one of the biggest cryptocurrencies that uses the ZKRP modeling.
What's next for ING- Even though Zero-Knowledge is a more technical, complex solution, and headache from regulations for banks, the positive outcome of INGs test will facilitate the entrance of other blockchain powered solutions for the bank in the near future.
What 2019 holds for blockchain technology and banks.
Regulatory frameworks moving forward around the world, banks build up their digital asset teams, and cryptocurrencies become a new institutional investment class. We will witness a massive influx of blockchain powered solutions and cryptocurrency trading desks being announced or offered by banks and financial institutions in 2019. J.P Morgan together with 75 other banks are leveraging Quorum, a permissioned/private based blockchain forked from Ethereum to create faster international payment solutions for their clients. The Australian Stock Exchange sets to retool their legacy system from CHESS to distributed ledger systems, and NYSEs parent company ICE announcement of rolling out Bakt, a digital asset trading exchange means innovative banks are in no circumstances of falling behind this technological breakthrough. In the digital and customer-centric era we live in, it is important for updating technology to offer the best services to clients.
Blockchain buzzwords, banks should be aware in 2019- Security Token Offering (STOs), Polymath, Harbor, Stablecoins, Paxos, Stellar Lumens, Security Tokens, Howie Test, Bakt, Decentralized exchanges (DEX), Bitcoin ETF, Bitcoin Futures, Basis, Binance, Coinbase, Circle.
**Please be adviced this article is not a financial advice, this article should be taken for informational purposes.
By Menajem Benchimol.